Zhone’s business shifts overseas

Zhone Technologies’ business shifted internationally in the second quarter, as half of the company’s $44 million in revenue came from outside the United States.

Zhone has typically reported about 45% of its revenue as international, with an exception in the second half of last year, when it was closer to a third of total revenue. That number was 47% in this year’s first quarter but grew to 50% in the second quarter as one overseas customer upped its spending on the access equipment Zhone sells.

That customer--one “we announced a long time ago,” according to Zhone’s Chief Executive Officer, Mory Ejabat--spent about $4.8 million on Zhone gear in the second quarter, contributing 11% of Zhone’s total revenue and becoming the only customer in recent memory to contribute more than 10% of Zhone’s quarterly revenue.

That customer also forced Zhone to drop its prices during the quarter, forcing the vendor’s gross margins lower. As a result, Zhone reported second-quarter gross margins of 34%, missing the range of 35% to 37% it had predicted. The company expects margins between 33% and 35% in the third quarter.

The price reduction was negotiated by the customer “several years ago,” Ejabat said, and not the result of pressure from other vendors. In fact, competitive pricing pressure has eased up lately, he said. “We’re seeing pricing pressure getting better. The Chinese manufacturers are not as aggressive as they were in the past year or so. They’re getting to the point where they have to provide quality products with the right pricing.”

“We see less Chinese manufacturers being active in our market price-wise, and technology-wise, they’re falling behind,” he added.

When asked if Zhone would add internationally popular gigabit Ethernet passive optical networking (GE-PON) gear to its GPON products, Ejabat said, “We’ll not address that market at this point because the pricing of standards-based GPON--especially the chip sets--is going to come down to the point that there’s no measured difference in the cost structure for GE-PON versus GPON.”

Zhone reported a $4.6 million net loss for the second quarter and expectations for a $3-million to $4-million loss in the third quarter. Third quarter revenue should be flat or slightly lower sequentially: between $42 million and $44 million.

“Although we are concerned about the lack of visibility and expected seasonality with our international customers in the short term, over the long term, we are excited about the prospects for the future of the company,” Ejabat said.